March 30, 2020
The Fed bought $183bn of agency mortgage-backed securities last week, as part of their continued efforts to stabilize the sector and ultimately drive down interest rates. The scale of purchases resulted in a dramatic rally in pricing with spreads tightening meaningfully. For instance, the price of FNMA 30-year 3.00s was approximately $100-20 on March 20, and today these securities are trading at $105-24. Nominal spreads on current-coupon MBS compared to Treasurys were compressed on a week-over-week basis, as 15-year decreased 69 bps to 72 bps, and spreads on 30-year declined 65 bps to 88 bps.
Financial institutions were less active in terms of adding new positions last week compared to the previous week when valuations were much lower. Many investors took advantage of the improvement in pricing and selectively sold TBA-deliverable securities into the rally. Proceeds were generally used to take advantage of wider spreads available in non-deliverable MBS or other sectors (CMOs, Municipals, Corporates). Spreads remain modestly wider for non-deliverable securities such as GNMA 15- and 30-year pools, and both GNMA and conventional pools collateralized by jumbo loans.
Mortgage Rates and Refinance Activity
Mortgage rates finally moved in the same direction as Treasury yields last week, with 15-year declining 16 bps to 3.28% and 30-year decreasing 17 bps to 3.80%. However, mortgage rates remain high relative to swaps and Treasury yields as lenders have increased offering rates as a method to handle overwhelming refinancing demand. Mortgage rates are essentially unchanged from December 31, 2019, while the yield on a 10-year Treasury has declined 123 basis points. Mortgage applications for the week ending March 20 fell 29.4% on an expected 33.8% drop in refi apps and a discouraging 14.6% decline in purchase apps.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP